This week, in our pattern analysis group, we’re looking at Trend Termination plays.
This terminology might be a bit confusing at first. It stems from a system I came up with when I wrote my first book, under which I noted that we can categorize all technical, directional trades into one of four categories:
- Trend continuation
- Trend termination
- Support or resistance holding
- Support or resistance breaking
This is a very high-level categorization system, but it has stood the test of time—I use it myself and thousands of other traders have told me it’s useful in their work. Of course, it’s not perfect; trades might fall under more than one category, and there are certainly kinds of trades that do not fit into this system. (Examples might be quantitative mean reversion, relative value strategies, trading time and/or vol with options, and fundamentally-driven approaches… these are, by design, outside of the scope of the system.)
Last week, we started a “Pattern Trading School” in this Facebook group, and we focused on Trend Continuation. This week, we will focus on Trend Termination.
The name “trend termination” was carefully chosen. Many traders might call these trend reversal trades, but there’s a problem with that—do you really expect a reversal? Sometimes, maybe all we expect is a pause or setback in the trend. Sometimes maybe we just expect the trend to stop. It does not have to be a complete reversal of trend.
Also to be considered is the issue of timeframe. I would encourage you to keep this simple: focus on either one timeframe, or the higher timeframe. Don’t try to wrap three timeframes into this because that’s an invitation to paralysis by analysis. In other words, we can take a short on the daily because we think the daily uptrend is failing or perhaps because we think the weekly uptrend is failing… not because we think the 15 minute chart might be failing.
If these trades are new to you, here’s some background reading:
- The problem with reversals
- The trend is your friend, except…
- And a blog I wrote with a picture of a guy peeing off a boat (no joke)
- General thoughts on trading against a bias
So, come and join us in the group. This is a good chance to see many examples of patterns from other traders, and to get feedback on patterns you are watching.